TaxTMI 
TaxTMI 
1962 (7) TMI 37
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....pital Profit-sharing ratios 1 2 3 Rs. per cent. 1. T. Stanes and Company Ltd. 26,000 26 2. Stanes (Motors) South India Ltd. 25,000 25 3. P.W. Davis 15,000 15 4. M.P. Davis 25,000 25 5. A.J. Davis 9,000 9 Total 1,00,000 100 3. The duration of the partnership was agreed to be ten years from November 5, 1948. The following are certain other important clauses in the aforesaid deed, annexure "A", clause 17. Clause 17.--If any partner shall-- (a) commit any breach of clause 15 or 16, or (b) commit any act of insolvency, or (c) do or suffer any act which would be lawful ground for the dissolution of the partnership, then, in any of such events, the other partners may by one calendar month's notice in writing to the offending partners determine the partnership. Clause 18.--(i) If during the continuance of the partnership, any partner shall die or go into liquidation or determine the partnership by notice pursuant to the provisions hereinbefore contained, the surviving partners or partner shall in the prop....
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....lied in the first place in discharge of the liabilities of the partnership and the expenses of liquidating the same and realising the assets thereof and in the next place in payment to each partner or his representatives of any unpaid interest or profits coming to him including his share of the sum for the time being standing to the credit of the reserve fund and of the amount due to him in respect of capital and the surplus (if any) of the moneys realised as aforesaid shall be divided between the partners or their representatives in the shares in which the partners shall be entitled to the net profits of the said business and the partners or their representatives shall execute such instruments for facilitating and effecting the realisation and division of the assets of the partnership and for their mutual indemnity and release and otherwise as may be requisite or proper. Provided that if the moneys realised as aforesaid shall not be sufficient to pay in full the respective shares of the partners or their representatives in the said capital the same shall be paid rateably as far as such moneys will extend and no partner or his representatives shall have any claim against the others....
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....955 1956-57 1,28,993 " 10. The book results up to June 30, 1950, were not divided among all the five partners aforesaid. The result of the next five years July 1, 1950, to June 30, 1955, were carried forward from year to year along with the losses of the former period and the balance in the profit and loss account thus accumulated divided between partners Nos. 1 and 2 referred to in paragraph 2 supra only on June 30, 1955, in the proportions of 51 per cent. and 49 per cent. as aforesaid. 11. For the assessment year 1952-53 in respect of the previous year ended June 30, 1951, two applications for registration of the aforesaid firm were filed under section 26A. One was a renewal application in respect of the profits up to September 21, 1950, the date of the dissolution signed by the five partners aforesaid, and the other, an original application for the period thereafter, signed by only the two partners, items Nos. 1 and 2, referred in paragraph 2 supra, who also signed the renewal applications for the subsequent four years of assessments 1953-54 to 1956-57. 12. The Income-tax Officer refused to register the firm for all the aforesaid five years of assessm....
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....er by the remaining two partners by means of the following entries in the books of the partnership on page 76 thereof: Cr. Dr. Rs. Rs. To Stanes and Company Limited., Coimbatore 25,000 To Stanes Motors (South India) Limited 24,000 M.P. Davis share capital 25,000 P.W. Davis " 15,000 A.J. Davis " 9,000 By the aforesaid reorientation the two residuary partners had to their credit the following capital contribution: T. Stanes and Company Limited 51,000 Stanes Motors (South India) Limited 49,000 Total 1,00,000 account determined and adjusted to partners' accounts. Thus the assessee is not entitled to claim registration or renewal of registration for that matter, for the first period. (b) The original partnership deed, though for a period of ten years from November 5, 1948, stands automatically cancelled in the face of the dissolution deed executed on September 21, 1950, and which in no case can be taken to mean as an operative instrument indicating the formation or continuation of any pa....
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....come-tax Officer's orders refusing to grant registration to the firm on this ground." 14. For the assessment year 1956-57, however, the Appellate Assistant Commissioner accepted the assessee's contention that the original deed of partnership and the deed of dissolution between them constituted a proper instrument constituting the assessee firm. Extracts from his order containing this decision are set out below: "The duration of the original partnership is for a period of ten years. But provision is made therein for reduction in the number of partners and for the continuance of the business by the surviving partners. The dissolution of the partnership envisaged by the deed dated September 21, 1950, is in pursuance of the provisions of clause 18 of the original partnership deed and not of clause 19 which contemplated a total dissolution. Under clause 39 of the Indian Partnership Act, 1932, dissolution of the firm means dissolution of partnership between all the partners of a firm. This envisages that the firm comes to an end and is completely dissolved. Clause 19 envisages such a dissolution. In clause 18, the word dissolution has been used in rather a loose manner for ....
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....arry on the business of this firm. As stated earlier the surviving partners applied for renewal of registration. The claims for the earlier four years were disallowed entirely on different grounds. As this defect is entirely removed so far as the year of account is concerned and as all the other formalities connected with the application for renewal of registration have been complied with, I am of opinion that the appellant is entitled to the benefits of registration. The Income-tax Officer's order is cancelled." 15. Against the aforesaid decision of the Appellate Assistant Commissioner, both the parties appealed. The department challenged the decision for 1956-57 on the ground that there was no proper deed specifying the individual shares of the partners, whereas the assessee contended in the appeals for assessment years 1952-53 to 1955-56, that all the rules had been complied with. 16. In the assessee's appeal, the argument was that there was merely a change in the constitution brought about by the dissolution deed, annexure "B" aforesaid, that the assessee firm continued to carry on the same business with the same assets and liabilities as before and annexures "A",....
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....previous year" for assessment year 1953-54, the assessment was completed as follows: Rs. Profit for the year 11,572 Less carry forward from assessment year 1952-53 97 Balance 11,475 For the assessment year 1954-55: Profit for the year Rs. 37,661. The above assessments were accepted by the assessee who did not file any appeals to the Appellate Assistant Commissioner. 23. For the succeeding year ended June 30, 1954, the "previous year" for assessment year 1955-56, a profit of Rs. 1,26,352 was computed by the Income-tax Officer before whom no claim was made for any set-off against it of the aforesaid losses of 1950-51 and 1951-52. Though the assessee appealed to the Appellate Assistant Commissioner against the aforesaid computation, it did not raise in it any ground in respect of the carry forward. 24. The assessee appealed to the Appellate Tribunal against the orders of the Appellate Assistant Commissioner for the assessment years 1952-53 and 1955-56 referred to in paragraphs 20 and 22 supra, seeking to get set-off of the aforesaid carry forward losses of 1950-51 and 1951-52 under the authori....
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....952-53 and 1955-56?" K. R. Ramamdni for Subbaraya Iyer and S. Padmanabhan, for the assessee. S. Ranganathan, for the Commissioner. JUDGMENT The judgment of the court was delivered by JAGADISAN J.--This is a reference under section 66 of the Indian Income-tax Act arising out of a controversy between the revenue and the assessee, whether the firm of partnership styled Tyresoles (India), Calcutta, is registrable under section 26A of the Act for the assessment years 1952-53, 1953-54, 1954-55, 1955-56, and 1956-57. The Income-tax Officer refused registration and on appeal by the assessee to the Appellate Assistant Commissioner registration was refused for the first four years, but was granted for the fifth year 1956-57. Both the assessee and the department preferred appeals to the Income-tax Appellate Tribunal which restored the decision of the Income-tax Officer. The Tribunal however has referred the following questions of law to this court under section 66(1) of the Act at the instance of the assessee: "1. Whether the firm as constituted up to September 21, 1950, is the same as the one that carried on ....
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....p at the date of the dissolution of the share of the outgoing partner in the partnership net assets and effects including therein the goodwill of the business to be ascertained in case of dispute under the arbitration clause hereinafter contained".......(iv) "The purchase money shall be payable as to so much thereof as shall represent capital by six equal instalments at intervals of one calendar month (the first to be paid at the expiration of two calendar months from the date of the dissolution) with interest at the rate of six per cent. per annum on the amount thereof for the time being unpaid"...(vi) "The outgoing partner or his representatives shall do all such acts and execute all such assurances as may be necessary for vesting in the partners exercising the option the assets including the goodwill and property of the partnership at the date of the dissolution." Clause 18 extracted above prevents the dissolution of the firm which would normally occur in the event of the death of a partner or in the event of the liquidation of one of the partners which is a limited company registered under the Indian Companies Act. The right of the other partners of the firm who remained, af....
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....was Rs. 92,773 and in respect of the accounting year ended June 30, 1950 (1951-52), the loss was Rs. 44,407. In this state of affairs in September, 1950, the three individual partners who may be conveniently described as the "Davis group" resolved to retire from the partnership and to this course the two other partners who may be called the limited companies readily agreed. The terms and conditions of this arrangement were embodied in a document styled as a deed of dissolution dated September 21, 1950. It is necessary to set out the several clauses of this document as the ultimate decision in this case largely depends upon its construction. The document refers to the Davis Group as the retiring partners and to the limited companies as the continuing partners. Clause 1 of this deed of dissolution is as follows: "The said partnership between the parties hereto in the business of manufacturing and selling tyresoles, etc., carried on by them under the said deed of partnership is hereby declared to be dissolved by mutual consent so far as the retiring partners are concerned on this the 21st day of September, 1950, and the said business shall from that date be carried on by the continuin....
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....e the name of the retiring partner upon indemnifying him against all costs and liability incurred by such use." Clause 8: "The continuing partners shall pay all debts and liabilities of the late partnership and shall indemnify the retiring partners against the same and all actions, proceedings, costs, claims and demands in respect thereof." The nomenclature of the document which is styled as a deed of dissolution and the reference to the partnership in several clauses of the instrument as the "late partnership" have weighed with the Income-tax Officer and the Tribunal in determining the true scope and character of the instrument. Before discussing the crucial question arising in the case, namely, whether there was in fact a dissolution of the firm constituted under the instrument dated November 5, 1948, or whether that firm was merely reconstituted after the retirement of the Davis Group of partners, we shall refer to some other facts. The book results of profits and losses for the five years in question are as follows: Previous year Assessment year Agreed results Rs. 30-6-1951 1952-53 up to 21-9-1950 810 ....
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....sioner observed thus in his order: "Inasmuch as the losses of the first two years and the profits of the second two years as per books were not so divided or credited in the accounts, the certificates given by the appellant in support of their applications for registration and renewal of registration are not correct at all. As this statutory requirement has not been fulfilled, the appellant is not entitled to the benefits of registration for these years. I accordingly confirm the Income-tax Officer's orders refusing to grant registration to the firm on this ground. "For the assessment year 1956-57, the Appellate Assistant Commissioner held that the assessee was entitled to registration as in his view there was no dissolution of the original partnership but was only a reconstitution as per the terms of the deed dated September 21, 1950, and as admittedly in respect of this year there has been a division of profits between the partners in the ratio of 51% and 49%, the shares to which they are entitled. The Income-tax Appellate Tribunal differred from the view of the Appellate Assistant Commissioner and held that there was in fact a dissolution, that the terms of the document d....
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....and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be..." In T.C. No. 12 of 1955, Ramachandra Iyer J., as he then was, pointed out that retirement of a partner need not necessarily have the effect of the dissolution of the firm in law. The learned judge observed: "The firm, though originally constituted with five partners, continued to function after its reconstitution by the retirement of two of its original five partners. A retirement of a partner may sometimes happen by dissolving the firm. It can also take place without any such dissolution. Section 32 of the Indian Partnership Act enumerates the circumstances in which a partner may retire from a firm without a dissolution (in such cases the number of the remaining partners should be two or more). The remaining partners would then continue to carry on the business of the firm, and such continuance does not involve the concept of the dissolution of the firm as originally constituted and the formation of a new firm by the other partners. Section 17(a) of the Partnership Act prescribes that the mutual rights and duties of the partners in the reconstitut....
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....r as the retiring partners are concerned. A full and complete dissolution of the partnership between all the partners would certainly have not been described in this manner if in fact such a dissolution was intended by the parties. The clause that provides for the continuance of the business of the surviving partners and which enables the outgoing partners to a share of profits which the firm may earn in future after September 21, 1950, till November 4, 1958, after adjustment of the previous year's losses including such commission as T. Stanes & Co. may draw, quite significantly emphasise the intention of the parties that there was to be no dissolution of the firm. No member of a dissolved firm can insist as a term of dissolution that the quondam partnership business should be carried on by the other members for his benefit also. Such a stipulation is wholly repugnant to dissolution. Now there cannot be both a dissolution and a continuance. But in the case of a retirement of a partner it is open to the outgoing partner to bargain for a share in the future profits of the firm after his retirement as consideration for his retirement. A clause of this description (clause 3 in the ....